When Paternalism Meets Bogus Economics
The New Economics Foundation’s
21 hours Report
Kristian Niemietz
IEA Current Controversies Paper No. 30
March 2010
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When Paternalism Meets Bogus Economics:
The New Economics Foundation’s 21 hours Report
Kristian Niemietz1
A New Economics Foundation (NEF) report proposes a gradual reduction of the
standard working week to 21 hours within about a decade, to achieve three
goals: make society more equal, happier, and drastically reduce carbon
emissions. This paper shows that the NEF proposal would not achieve the first
two goals at all, and the third one only at tremendous cost. The trade-off that
people make between leisure and consumption is an entirely private matter.
There is no economic rationale for third party interference.
Introduction
The New Economics Foundation (NEF) has produced a report making the case
for a gradual reduction of the standard working week from 40 to 21 hours over
the course of about a decade. A drastic reduction in working time, the Foundation
argues, would serve to attain three goals: increase people’s well-being, reduce
social inequalities, and decrease carbon emissions. The report concedes that
there will be transition problems, but is optimistic that these can be overcome.
Media responses have been largely favourable.2
The report can be read at two levels. On the one hand, 21 Hours attempts to
convince the reader of the virtues of a non-materialistic lifestyle, as opposed to a
career-centred and consumption-driven one. At the same time, 21 Hours is a
policy paper, advocating government interventions to rectify what the authors,
Coote et al., seem to interpret as ‘market failures’. This paper will focus
exclusively on this second theme of the report. It will not express any opinion on
the merits or demerits of any particular lifestyle choice.
As a policy paper, 21 hours is not about persuading people to voluntarily adopt
less work-centred lives and more ascetic consumption habits. Initially, the
authors emphasise: ‘Anyone can disagree and many will do things differently. [...]
Let’s be clear: there’ll be no time police roaming the call centres and coffee bars’
(Coote et al, 2010, pp. 5-6). But towards the end, this position is completely
reversed:
‘At government level, regulations will be required to standardise working hours. The EU
Working Time Directive is a step in the right direction but a long way from where we want to
go. Current standards will have to be reduced steadily over the coming years. They must
be designed to exert a strong influence over the actual hours that people work’ (ibid., p. 29).
1
Kristian Niemietz is the IEA’s Poverty Research Fellow ([email protected]).
See BBC News: ‘Cut working week to 21 hours, urges think tank’, 13 February 2010;
The Guardian: ‘Working week should be 21 hours, says New Economic Foundation, 13 February
2010.
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The authors’ emphasis on the importance of flexibility refers to how people
distribute their maximum allotted working time over the course of a year. As far
as the total amount is concerned, they demand ‘clear limits to the number of
hours worked’ (ibid.).
It is only with this specification in mind that passages like the following one can
be properly understood:
‘[A] shorter working week would reduce the amount of money people can earn. Those on
low rates of pay would be hardest hit [...] There is a risk of strong resistance not only from
low-paid workers and their trade unions, but also from the middle classes and their unions
and professional bodies’ (ibid pp. 26-27).
Workless people, overworked people: a market failure?
The NEF argues that when expressed as an average for the total working age
population, which includes the workless and the economically inactive, weekly
working hours are already quite close to their preferred figure. In this sense, their
proposal is not so much about reducing the total number of hours worked in the
country, but about distributing them more evenly between the workless and the
overworked, rich and poor, as well as men and women. ‘[R]edistributing paid
work will lead to a more equal society’ (ibid p. 6).
This is essentially a variant of the idea that the amount of work which is ‘required’
in an economy is somehow fixed, and has to be distributed ‘justly’. It resembles
the arguments by Reid (1986) and Drese et al. (1986), who attempted to provide
the theoretical underpinnings for ‘work-sharing’ policies.
The case for work-sharing rests on a number of assumptions. Demand for
working hours must be largely fixed; work must be easily divisible; and the work
of one person must be a close substitute for the work of another person. When
these conditions hold, an employer will be indifferent between employing A for 40
hours, or employing A and B for 20 hours each. But when the conditions are
violated, then work-sharing imposes additional costs per working hour, and the
quantity of hours demanded can decrease – the ‘scale effect’. Scale effects can
arise when, for example, B cannot fully match A’s skills, or when the splitting of
responsibilities entails friction losses. The scale effect can be exacerbated when
there is an additional person, C, whose work is not substitutional but
complementary to A’s work.
In the early 1980s, several countries experimented with work-sharing
experiments with disappointing results. In France, the Mitterrand government
imposed a mandatory reduction in standard working hours from 40 to 39 hours in
1982, coupled with a reduction in maximum overtime hours and compensatory
wage increases for minimum wage earners. Crépon and Kramarz (2002)
explored the employment effects empirically and found that:
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‘Changes in the legal standard workweek led to employment losses, contrary to the initial
goals of these policies [...] the workers most affected were precisely the minimum-wage
workers whom such policies try to protect’ (ibid, pp. 1384-1386).
In West Germany, the IG Metall union achieved a reduction of the regular
working week from 40 to 38.5 hours in 1985, motivated by work-sharing
considerations. Due to the system of centralised collective bargaining, this
agreement was binding not just for union members but for all workers in the
industries under the union’s remit. Hunt and Katz (1998) examined the
experiment and found ‘Existing evidence suggests that employment declines as a
result of work-sharing’ (ibid., p. 340).
In the Netherlands, work-sharing was a supplementary component of the
employment-creation strategies of the 1980s. Riechel (1986) explored the
employment effects and concluded: ‘The related drop in overall productivity and
the accompanying rise in unit labor costs are a strong impediment against the
success of work-sharing’ (ibid., p. 538).
While these results might be, to some extent, country specific, Booth and
Schiantarelli (1987) developed a theoretical model with upper and lower bounds
for the chosen parameters to explore a variety of possible scenarios. Their
general conclusion was that ‘the employment effects of a reduction in hours are
ambiguous, and in our view, likely to be negative’ (ibid, p. 246).
So what justifies the NEF’s hope that this tool, which has performed modestly
when tested on a small scale, should be able to transform the unskilled long-term
unemployed into high-skilled professionals? Long-term entrenched worklessness
is caused by a variety of factors such as the stickiness of the welfare system,
misguided interventions in the labour markets, and an education system that fails
the low-skilled. It is not caused by a market failure. Demand for labour is not fixed
and working hours cannot simply be redistributed.
The consumer society as a prisoner’s dilemma
‘In high-income countries we are consuming [...] in ways that ultimately fail to satisfy us. [...]
Those who can afford to participate are never truly satisfied, however much they consume’
(p. 5).
‘A 21-hour week would help get people off the consumer treadmill. [...] What we feel we
need and what satisfies our needs are inflated well beyond what is actually required to live
a good and satisfying life. We buy much more than enough stuff’ (p. 17).
A reader coming from a classical liberal background will perceive such lines as
expressions of a conceited authoritarianism. Yet these passages must be read
keeping the NEF authors’ economic assumptions in mind. NEF economics is
arguably a variant of ‘Happiness Economics’, which holds that ‘subjective wellbeing’ (SWB) can be measured and consciously promoted by government. The
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central tenet is that consumption does not increase SWB, but people strive for it
nevertheless, because they feel pressurised to keep up with others. People want
to switch to a high-leisure, low-consumption lifestyle, but only if others do so as
well:
‘One of the central findings of the large scientific literature on subjective well-being is that
once income levels surpass a minimal absolute threshold, average satisfaction levels within
a given country tend to be highly stable over time, even in the face of significant economic
growth’ (Frank, 1999, p. 72).
‘When I earn more and adopt a more expensive lifestyle, this puts pressure on others to
keep up – my action raises the norm and makes them less satisfied with what they have. I
am like the factory owner who pours out his soot on to the neighbours’ laundry. And the
classic economic remedy for pollution is to make the polluters pay’ (Layard, 2005, pp. 1516).
For readers not familiar with this set of assumptions, it may be helpful to think of
the ‘consumer society’ as a gigantic prisoners’ dilemma with the following payout
structure:3
Player 2
→
Player 1 ↓
Overconsume
Don’t
overconsume
Overconsume
5, 5
11, 0
Don’t
overconsume
0, 11
10, 10
Solving the exercise shows that overconsumption is the dominant strategy for
both players, who therefore get stuck in a suboptimal equilibrium, which they
cannot break out of without external help. Frank and Layard recommended high
taxes on labour as a solution, but Alvarez-Cuadrado (2007) shows that an upper
limit on working hours is a feasible equivalent. Thinking within these assumptions
for a moment may explain why Coote et al. are so confident that their proposal
would be hugely popular once adopted (see p. 32), while provoking strong
resistance during the implementation phase (p. 27).
But what if these assumptions themselves are wrong? Proponents of this branch
of Happiness Economics have simply observed a data pattern and constructed a
theory around it. As Stevenson and Wolfers (2008) have shown, much of these
data were themselves limited and inadequate. Correcting for measurement
shortcomings, Stevenson and Wolfers show that many conclusions from earlier
SWB-studies had been premature. There is a fairly robust, positive association
between absolute wealth and well-being. Consumption may be a status race for
3
The payout numbers are, of course, entirely arbitrary.
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some segments of society, but most people work and consume simply because
they want to. The NEF authors’ exaggerated confidence in their ability to judge
what makes other people happy stands on very thin ice.
Abundance of leisure in the do-it-yourself economy?
21 hours describes, in colourful terms, the opportunities opened up by a leisureabundant life, and its beneficial character-moulding effects. But it also extols the
virtues of ‘making more things ourselves’ instead of buying them (pp. 17 and 31),
without realising that this is a contradiction in terms. Whether or not a mandatory
reduction in formal working hours leads to an increase in leisure depends on the
extent to which people try to compensate for the income loss through increased
in-house production. Paid work that serves the purpose of affording a washing
machine, clothes and furniture could at least partially be substituted by washing
by hand, knitting clothes and making furniture. If the NEF-proposal was
implemented, we could end up with decreased living standards and fewer leisure
hours, due to the efficiency losses that would result from rolling back the division
of labour. The NEF-authors provide no reason for their implicit assertions that
self-supply is morally superior to working for pay, and per se more conducive to
SWB.
The third goal the NEF proposal is meant to deliver is a drastic reduction in
carbon emissions, and by causing a sharp contraction of economic output it
would probably achieve this goal. But of all the possible carbon reduction
strategies, this is almost certainly the one with the highest cost per avoided unit
of CO2. An across-the-board cut in working hours would affect carbon-intensive
and low-carbon industries alike, and provide no incentives for the former to
search for ways to cut carbon emissions.
Conclusion
The NEF proposes a gradual but deep cut in working hours to achieve three
goals: make society more equal, happier, and reduce carbon emissions. This
paper has shown that with the NEF proposal, the first two goals will not be
achieved at all, and the third one only at a tremendous unnecessary cost. The
trade-off people choose to make between leisure and consumption is an entirely
private matter. It is nobody else’s business, and there is no economic justification
for government interference.
What governments can do, however, is establish a framework within which
people can attain high levels of both leisure and consumption. ‘Old Economics’
suggests that in the long run, the amount of hours worked falls as labour
productivity rises. Increasing real wages give rise to a substitution effect (the
opportunity cost of leisure increases) and an income effect (people can afford
more leisure for any given level of consumption). The substitution effect usually
dominates in the short run – which is why labour supply often increases after a
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cut in income tax – while the income effect dominates in the long run. Even
though the NEF suggests otherwise, the UK has been no exception (see Figure
1).
Figure 1: Average hours worked per person and year in the UK, 1970-2008
OECD Stat Extracts, accessed 21 February 2010
The major driver of the long-term fall in working hours is precisely the force which
the NEF seems to be vehemently opposed to and eager to see eradicated:
economic growth.
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References
Alvarez-Cuadrado, F. (2007) ‘Envie, leisure, and restrictions on working hours’,
Canadian Journal of Economics, 40, 4, 1286-1310.
Booth, A. and F. Schiantarelli (1987) ‘The Employment Effects of a Shorter
Working Week’, Economica, New Series, 54, 214, 237-248.
Coote, A., J. Franklin and A. Simms (2010) 21 hours. Why a shorter working
week can help us all to flourish in the 21st century, London: New Economics
Foundation.
Crépon, B. and F. Kramarz (2002) ‘Employed 40 Hours or Not Employed 39:
Lessons from the 1982 Mandatory Reduction of the Workweek’, The Journal of
Political Economy, 110, 6, 1355-1389.
Dreze, J., T. Persson and M. Miller (1986) ‘Work-Sharing: Some Theory and
Recent European Experience’, Economic Policy, 1, 3, 562-619.
Frank, R. (1999) Luxury Fever: Why Money Fails to Satisfy in an Era of Excess,
The Free Press.
Hunt, J. and L. Katz (1998) ‘Hours Reductions as Work-Sharing’, Brookings
Papers on Economic Activity, 1998, 1, 339-381.
Layard, R. (2005) ‘Happiness is back’, Prospect, 2005, 108, 14-21.
Organization for Economic Cooperation and Development (2010) OECD.Stat
Extracts.
Reid, F. (1986) ‘Combatting Unemployment through Work Time Reductions’,
Canadian Public Policy, 12, 2, 275-285.
Riechel, K. (1986) ‘Labor Market Disequilibrium and the Scope for Work-Sharing:
A Case Study of the Netherlands’, International Monetary Fund Staff Papers, 33,
3, 509-540.
Stevenson, B. and J. Wolfers (2008) ‘Economic Growth and Subjective WellBeing: Reassessing the Easterlin Paradox’, IZA Discussion Paper No. 3654,
Forschungsinstitut zur Zukunft der Arbeit.
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